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CARES Act Tax Provisions

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The new tax laws and provisions introduced by the CARES Act, along with the current state of the economy, significantly change the landscape for tax planning and create many opportunities.

The CARES Act waives Required Minimum Distributions (RMDs) from certain defined contribution plans and Individual Retirement Accounts (IRAs) for the 2020 tax year. Keeping this money in your account for this year allows your portfolio to have growth potential. Hopefully, it will recover some of the value it recently lost. Not taking your RMDs also lowers your taxable income for 2020.

But what happens if you’ve already taken your 2020 RMD? Normally, RMDs are ineligible for rollovers. The CARES Act allows you to roll over your 2020 RMD to an IRA or other qualified retirement plan to avoid paying tax on that distribution (depending on circumstances). If you took or will take your RMD between February 1st and May 15th, you have until July 15th to roll over that distribution and thereby avoid paying the tax.

Another opportunity to consider is converting a traditional IRA to a Roth IRA. This strategy is now beneficial because it could reduce your 2020 taxable income due to the absence of the 2020 RMD (and other potential losses from the current economic situation). An added bonus is that the tax effect of the conversion will be lower because the value of the assets in the account being converted may be less due to current market conditions.

The CARES Act also allows you to access money in your retirement accounts without the usual penalties. This relief may be available to you if:

  • You, your spouse or another dependent has been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
  • You have suffered financial consequences due to COVID-19 (quarantine, job loss, furlough, reduction in hours, inability to work due to lack of child care or loss of your business).

Tapping your retirement early is an important decision. You should not do this unless you really need the money. If you qualify and you believe this withdrawal is necessary, you may withdraw up to a total of $100,000 from your retirement accounts between now and December 31, 2020 without being subject to 10% early withdrawal penalty.

Whenever you take a distribution of pre-tax money from your retirement account, you have to pay tax on that distribution. The CARES Act allows you to pay those taxes over a three-year period beginning in 2020. You can also repay some, or all, of the distribution back to your plan and avoid paying tax on the distribution so long as you pay the money back within three years.

Nonqualified Stock Options (NSOs) are a benefit included in many employee compensation packages. When you exercise NSOs, you must include the difference between the exercise price and the fair market value of the stock on the date of exercise in your taxable income for that year. This income is subject to ordinary income tax rates.

If you currently hold NSOs, exercising them now may be beneficial because many stock prices have declined. Your taxable, ordinary income could be reduced since the spread between the exercise price and value of the stock may have decreased. This assumes that the value of the stock is still greater than the exercise price of the options. If the value of the stock is less than the options, you do not want to exercise these options until the value again exceeds the exercise price.

For example, if you decided to exercise your NSOs at an exercise price of $10 per share when the fair market value of the stock is currently $15 per share, you would realize $5 per share of taxable, ordinary income. If you had sold that stock six months earlier, when the fair market value of the stock was $25 per share, you would have realized $15 of taxable income per share and paid tax on that amount.

If you own concentrated stock positions that make up a large portion of your overall portfolio, you may have an opportunity to sell those concentrated positions and, even though the stock price may have recently declined, these sales would still generate capital gains. These gains may be offset if you have other realized losses that were generated due to the economic downturn. If the concentrated position has declined to the point that it would generate losses however, it could be beneficial to not only get out of the concentrated position, but to also harvest those losses in order to offset capital gains you may have incurred elsewhere.

As a result of efforts to stem the the spread of COVID-19, many businesses will suffer significant losses in 2020. A good number of these businesses are structured as pass-through entities and, as a business owner, you would report these losses on your personal income tax returns. The CARES Act provides additional relief by reinstating the five-year Net Operating Loss (NOL) carry back for losses arising in any taxable year between Dec. 31, 2017 and Jan. 1, 2021. NOLs were previously only allowed to be carried forward to future years. Any NOLs that were generated after Dec. 31, 2017, were subject to a taxable income limitation. The CARES Act temporarily suspends this rule until after Dec. 31, 2020. This allows NOLs to fully offset income.

The 2017 tax law limited your ability to deduct excess business losses for tax years after Dec. 31, 2017 and before Jan. 1, 2026. Excess business losses are the amounts by which the total deductions attributable to all your trades or businesses, including pass-through entities, exceeds your total gross income and gains attributable to those trades or businesses in any given year.

If you file as single, you can deduct excess business losses up to $250,000 or $500,000 if you file jointly. Any excess over the maximum amount can be carried forward and applied against income in future years.

The CARES Act amended this limitation for tax years beginning after December 31, 2017 through December 31, 2020. The CARES Act reinstates your ability to deduct excess business losses that would have otherwise been disallowed. If you had limited losses in 2018 and/or 2019, consider amending your returns to take advantage of the losses and generate refunds to obtain essential cash flow.

Adapted from Rachel Efthemes, Olga Lubomirsky, and Allison Towle on

Charles Oliver
Wealth Strategist | Best-Selling Author
We help Baby Boomers and Retirees thrive in retirement through a clear retirement road map that provides market correction and tax protection to optimize income and assets!